In 2005, several Chinese entrepreneurs started a milk production company, Modern Dairy. The company realized there was a huge opportunity in China for milk as right now the country is third in the world in terms of production.

Besides, in light of some of the contamination problems in the industry,especially last year's melamine scandal, there was a need for a better approach.

Well, Modern Dairy has caught the attention of the mighty private equity firm KKR. This week, the firm invested $150 million in the venture, according to Bloomberg.

On Wednesday, Dean Foods Company (NYSE: DF), the country's largest processor and distributor of milk and soy products, accepted the resignation of Alan Bernon, the president of the company's Dairy Group, in what may be the beginning of a large-scale reorganization to stave off further losses as the company moves into its 3Q earnings period. Dean Foods is losing its own milk money. The company is facing bottom-line difficulty, some if it self-caused. Earlier in the year, Dean Foods reported that net income, earnings from continuing operations and diluted EPS were all on the increase. Unfortunately, so were prices for raw milk, a significant expense for the company. Supply of organic milk far exceeded demand for the product, driving down prices. For reasons that remain unclear, at the end of 1Q 2007, Dean Foods recapitalized its balance sheet and increased its debt load to $5.3 billion. Senior management then paid out more than $1.9 billion, $15 per share, for a one-time dividend. This drove the stock up to $37.48. Immediately thereafter, the company began having finance problems that have continued into the second quarter.

Dean Foods posted 2Q earnings well off last year's numbers. Diluted EPS was $0.30, way down from one year ago EPS of $0.55. Adjusted net income dropped by almost half to $41.6 million. At the same time, interest expense doubled to $88.9 million for the quarter. Sales continue to increase while operating income continues to decline. Capital expenditures were down by $10 million. Unfortunately cash flow was down by almost 10X that amount, $95 million.